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Most people have great startup ideas
But a great idea doesn’t make a great BUSINESS
Questions you need to ask to determine if your idea will make $$$:
But a great idea doesn’t make a great BUSINESS
Questions you need to ask to determine if your idea will make $$$:
1/ USERS vs. CUSTOMERS
Is your business User-driven or Customer-Driven?
• USERS spend time on your platform
• CUSTOMERS pay you for products you sell
Example:
Facebook doesn’t charge its users anything
Its customers are companies who advertise on the platform
Is your business User-driven or Customer-Driven?
• USERS spend time on your platform
• CUSTOMERS pay you for products you sell
Example:
Facebook doesn’t charge its users anything
Its customers are companies who advertise on the platform
2/ VALUE
What is the exchange of value between your customers and your company?
Value comes down to 2 things:
1. Money
2. Time
What is the exchange of value between your customers and your company?
Value comes down to 2 things:
1. Money
2. Time
Are your customers paying you MONEY for a product you sell?
Are your customers/users spending TIME on your platform?
(i.e. you’re capturing attention)
Are your customers/users spending TIME on your platform?
(i.e. you’re capturing attention)
3/ FREQUENCY of TRANSACTIONS
How often do customers pay you for your product/service?
• Is it recurring?
• Is it one time?
Recurring revenue is ideal because it makes your revenue predictable
How often do customers pay you for your product/service?
• Is it recurring?
• Is it one time?
Recurring revenue is ideal because it makes your revenue predictable
4/ SALES FLYWHEEL
How do you get customers to KEEP BUYING from you?
One-time transactions aren’t bad but you have to create a system that encourages people to KEEP buying
How do you get customers to KEEP BUYING from you?
One-time transactions aren’t bad but you have to create a system that encourages people to KEEP buying
Example: Gillette Razors and Razor blades
The Razor ➡️ One-time revenue
Razor blades ➡️ Recurring revenue
The Razor ➡️ One-time revenue
Razor blades ➡️ Recurring revenue
5/ INCREASE SALES
How can you increase sales?
Is your product something that is volume-driven or price-driven?
How can you increase sales?
Is your product something that is volume-driven or price-driven?
Every company must make a choice:
1. Do we sell more stuff?
⬆️ Volume
2. Do we charge more for our stuff?
⬆️ Prices
You increase your sales by using either (1) or (2), or both
1. Do we sell more stuff?
⬆️ Volume
2. Do we charge more for our stuff?
⬆️ Prices
You increase your sales by using either (1) or (2), or both
7/ COSTS
What are the biggest costs in your business?
• For software startups, it’s the initial cost of building the product
• For service businesses, it’s the people (i.e. payroll) that deliver the service
• For eCommerce businesses, it’s Cost of Goods Sold / Inventory
What are the biggest costs in your business?
• For software startups, it’s the initial cost of building the product
• For service businesses, it’s the people (i.e. payroll) that deliver the service
• For eCommerce businesses, it’s Cost of Goods Sold / Inventory
6/ REVENUE vs. CASH FLOW
• When do you book revenue in your company?
• When do you collect cash from your customers?
These two events are not the same thing
Failing to understand this, can kill your business
Here is a thread that breaks this down:
• When do you book revenue in your company?
• When do you collect cash from your customers?
These two events are not the same thing
Failing to understand this, can kill your business
Here is a thread that breaks this down:
8/ HOW TO ADD CUSTOMERS
How do you get new customers?
Regardless of how great your idea is, you need to KEEP ADDING customers because some customers may leave or stop buying
Do you need to invest in:
• A sales team?
• A customer support team?
• A marketing team?
How do you get new customers?
Regardless of how great your idea is, you need to KEEP ADDING customers because some customers may leave or stop buying
Do you need to invest in:
• A sales team?
• A customer support team?
• A marketing team?
9/ CUSTOMER CHURN
How many customers will stop buying your service or product every year?
You need to know this
How many customers will stop buying your service or product every year?
You need to know this
The number of new customers you add every year needs to make up for:
• The customers you lose and then some
• The customers you lose and then some
10/ COST OF ACQUISITION
How much money do you need to spend to get a new customer?
In order for you to have a sustainable business model:
Your REVENUE per customer should be higher than your COST OF ACQUISITION
How much money do you need to spend to get a new customer?
In order for you to have a sustainable business model:
Your REVENUE per customer should be higher than your COST OF ACQUISITION
Example:
If you’re spending $10 in sales and marketing to acquire a customer, they need to buy something from you worth more than $10
If not, you’re losing money on each customer
You won’t be able to keep doing this for long
If you’re spending $10 in sales and marketing to acquire a customer, they need to buy something from you worth more than $10
If not, you’re losing money on each customer
You won’t be able to keep doing this for long
10/ VARIABLE COSTS vs. FIXED COSTS
Not all costs are created equal
Variable costs fluctuate depending on how much product you sell
These are things like:
• Cost of Goods Sold
• Commissions
• Shipping
Not all costs are created equal
Variable costs fluctuate depending on how much product you sell
These are things like:
• Cost of Goods Sold
• Commissions
• Shipping
Fixed costs are incurred regardless of how much product you sell
These are things like:
• Rent
• Payroll
• Utilities
These are things like:
• Rent
• Payroll
• Utilities
11/ GROSS MARGIN
Your Gross Margin is how much money you make after you pay the cost to make or deliver your product
Gross Margin doesn’t take into account fixed costs
Your Gross Margin is how much money you make after you pay the cost to make or deliver your product
Gross Margin doesn’t take into account fixed costs
Example:
For an eCommerce business, Gross Margin is calculated as:
Revenue – Cost of Goods Sold
For an eCommerce business, Gross Margin is calculated as:
Revenue – Cost of Goods Sold
12/ UNIT ECONOMICS
Every good business owner knows how much Gross Margin or Profit they make by selling a SINGLE unit or their product
Every good business owner knows how much Gross Margin or Profit they make by selling a SINGLE unit or their product
They understand:
• Revenue per unit ➡️ Price
• Cost per unit ➡️ Fixed + Variable
If you don’t know this about your product, your business won’t survive for long
• Revenue per unit ➡️ Price
• Cost per unit ➡️ Fixed + Variable
If you don’t know this about your product, your business won’t survive for long
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I tweet about:
• Finance
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Let's learn together and follow @AliTheCFO
I tweet about:
• Finance
• Business
• Personal Growth
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Brian Bourque @bbourque
·
Mar 27, 2022
Great thread Ali